GBP/NZD Forecast for the Week Ahead

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The Pound is trading with an upside bias against the New Zealan Dollar and could potentially move up to the 1.98s if there is a breakout in the week ahead.

The Pound-to-New Zealand Dollar exchange rate is moving in a sideways consolidation range after having rallied up at the start of January.

According to our latest technical studies, the sideways range the exchange rate has been drifting in of late will probably breakout higher eventually and the exchange rate will continue rallying.

The bullish bias is due to the exchange rate's uptrend prior to the formation of the range and because based on the analyst's experience it looks more natural for it to breakout higher.

A break above the 1.9460 highs would probably lead to an extension higher to an initial target at 1.9840 where the November 2017 high is situated.

Major highs can provide significant obstacles as they are often levels where supply increases due to traders - who betted wrongly on the market going higher just before the major high - liquidating after holding onto their losing positions for a long period.

These traders are usually so relieved the market has rallied back up to their entry price that they would rather close their positions in order to breakeven than hold onto their longs in the hope the market will go higher again and tempt fate a second time.

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Data and Events to Watch for the New Zealand Dollar

The main release for the New Zealand Dollar in the week ahead, is the New Zealand Business PMI on Thursday at 21.30 GMT.

The Business PMI is a survey based indicator calculated from responses made by key managers in industry; it is generally quite a good forecaster of future trends.

In the previous month of December, it gave a reading of 51.2 which is above the 50 level which distinguishes between growth and contraction.

A higher result would be expected to be positive for the Kiwi.

Other data releases in the coming week include Business inflation expectations for Q1 2018, at 3.00 on Wednesday morning and Food Inflation for January at 21.45 on Tuesday.

Data and Events to Watch for the Pound

From a data perspective inflation and retail sales, releases dominate the outlook for the Pound in the week ahead.

Inflation is a driver of interest rates which in turn influence the Pound, so a rise in inflation will lead to a stronger Pound. OnThursday, February 8 the Pound rallied as the Bank of England communicated that interest rates might have to rise faster than previously anticipated in coming months in order to combat persistently high rates of inflation.

The Bank and markets alike will, therefore, be watching the latest installment in UK inflation data to see where the trends lie, the release is due out on Tuesday, February 13, at 9.30 GMT.

Forecasters expect a 2.9% rise compared to a year earlier (yoy); in the previous month of December, the inflation rate was a higher-than-expected 3.0% (yoy).

On a monthly basis, inflation is expected to decline by -0.6% in January.

Core inflation, which strips out volatile food and fuel components, is forecast to rise by 2.6% compared to 2.5% previously; often it is this number that moves markets.

On all accounts, should the data come in below expectation we would expect Sterling to decline, and should data beat expectations we would expect Sterling to rise.

The other main release is retail sales, which is scheduled for release on Friday, February 16, at 9.30.

A higher-than-expected result could reaffirm the UK economy's resilience and support Sterling.

Retail Sales is forecast to rise by 2.6% in January compared to a year ago when it only gained by 1.4%. Month-on-month it is forecast to increase by 0.5% from -1.5% previously.

"Looking ahead, the UK's inflation and retail sales reports are scheduled for release and if the data surprises to the downside like we expect, it may be difficult for GBP to rally," says Lien.

Data aside, the other major factor for Sterling in the coming week is likely to be how Brexit negotiations evolve.

The Pound fell last week following the revelation that the EU was reconsidering whether to allow the UK a two-year transition phase deal after the official Brexit deadline in 2019, in order to help negotiate a new trade relationship.

After a breakdown in talks over the nature of the UK's rights during the transition period itself, Chief EU Brexit negotiator Michel Barnier said that if the disagreements continued it was "not a given" the UK would even get a transition period at all.

This took the wind out of Sterling's sails after it rose strongly following the Bank of England's positive assessment of the economy on Thursday.

"Instead of making progress this week, Brexit negotiations have taken a step back and to the dismay of sterling bulls, this overshadowed the BoE's hawkishness," concluded Lien.

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Inflation expectations are important for currency markets because the RBNZ can only be expected to raise interest rates after inflation has made a sustainable return into the higher end of the 1% to 3% target band.

“We don’t foresee an OCR hike until late-2019. If anything, we would put the odds of an OCR reduction this year as slightly higher than the odds of a hike, although a large shock would be required to generate either,” - Westpac.

Fourth-quarter unemployment data comes ahead of the latest interest rate statement from the Reserve Bank of New Zealand, which could yield a hawkish change in the central bank's language, according to one strategist.